Novell Inc., a seller of network software whose stock has slid 85 percent in the past decade, received an unsolicited takeover bid from shareholder Elliott Associates LP that values the company at about $2 billion.

Novell’s shares jumped as much as 37 percent to $6.51 in extended trading, indicating that investors see the $5.75-a- share bid as too low. Elliott, a money management firm that owns about 8.5 percent of Novell’s shares outstanding, made the cash offer public in a letter today to the company’s board.

So who exactly is Elliott Associates LP and what are their intentions? From a post by Brian Proffitt at IT World:

Today’s news is different. Those past flirtations with Novell from Oracle and Sun were just that–flirtations. The offer from Elliott is real and potentially very dangerous.

The stock market reaction to the offer was predictable: Novell’s stock surged 27 percent right after the news broke, and it should stay strong for a while until the market figures out if this is a Good Thing.

The Linux community hasn’t raised a big fuss, though I suspect they’re still absorbing the news. I know I am, for my part. In particular, I am wondering what will happen to Novell if they accept this unsolicited bid?

A key passage in Elliott’s letter-slash-press release give some clues:

“Novell is a long-established company that we have followed closely for a considerable period of time. Over the past several years, the Company has attempted to diversify away from its legacy division with a series of acquisitions and changes in strategic focus that have largely been unsuccessful. As a result, we believe the Company’s stock has meaningfully underperformed all relevant indices and peers.”

First, let’s make sure that the “underperformed” label stays firmly in our minds. Whether you buy that or not about Novell, that’s the perception Elliott has, and it will drive the entire strategic vision Elliott will have to “fix” Novell if they do acquire the company. Typically when a group of investors comes in with that kind of attitude, they either think the target company is being wasteful (in which case, watch out for sharp cost-cutting measures, like layoffs) or is going in the wrong direction.

It seems Elliott (again, publicly) believes the latter. “Over the past several years, the Company has attempted to diversify away from its legacy division with a series of acquisitions and changes in strategic focus that have largely been unsuccessful,” is very interesting because it’s probably a not-too-subtle hint that Novell’s shift towards Linux has detracted from its “legacy” NetWare business. Where, apparently, Elliott believes there is real value.

Which begs the question, is Elliott crazy or faking us out?

There are some conspiracy theorists that the Elliott hedge funds involved in this purchase request are just a front for Microsoft, Canopy, or [insert antagonist here] in a bid to kill SUSE and the rest of Novell’s Linux product line dead. While this is certainly possible, given that like most private hedge funds, Elliott’s participants are locked up tighter than the script for the series finale of Lost, I am thinking no–Elliott is not going to kill off Novell or its Linux business on behalf of anyone else.

I suspect Elliott may kill Novell based on its own motives.

Why? A few searches on the Internet reveal a pattern for Elliott investments/acquisitions. Founded by Paul Singer, Elliott tends to specialize in distressed companies as investments–or nations. Elliott purchased $31 million in the Congo Republic’s debt a few years back and when the Congo didn’t–or couldn’t–pay, Elliott sued the nation for $100 million in principal, interest, and penalties. In 2008, the suits were settled, after at least $39 million had already been collected.

It’s a pattern of behavior for Elliott: in 1996 Elliott plunked down $11 million for discounted Peruvian debt and sued the country for $58 million. Ultimately, they got the $58 million. This is why Elliott is well-known in financial circles as a vulture fund.

This kind of distressed debt investment is something Elliott likes to do, even in the private sector. The hedge fund had enough invested in WorldCom to served on the beleaguered firm’s creditors’ committee during WorldCom’s bankruptcy. They like to come in and pick up bargains from dying or distressed organizations.

Clearly, these Elliott folks are no pushovers. Nor do I think they are crazy or inept enough to think they can redirect Novell towards a NetWare future, so I think yesterday’s offer letter is a bit of a feint. Elliott does see some sort of value in Novell–but likely not in its present form.

I believe it’s something in Novell’s patent portfolio or intellectual property that Elliott wants. Something like the UNIX rights, for instance. Whatever they want, I don’t believe Novell will survive the vivisection that could occur if the acquisition goes through.

I’d agree that’s it’s extremely unlikely that this is a shadowy conspiracy by the likes of Canopy or Microsoft, especially given the research Brian has done on Elliott. Whether they’re interested in breaking Novell into pieces or simply after Novell’s patent portfolio or intellectual property remains to be seen at this point. Either way I don’t see the acquisition being good for Novell or Open Source though. Which brings the next question. Is another suitor likely to jump in at this point. the Var Guy lists IBM, Hewlett-Packard, Microsoft, Oracle, SAP and Computer Associates as potential options. I’d add Cisco as another potential Dark Horse candidate, but agree that IBM and HP are exceedingly unlikely. The realty is that Novell is going to be difficult to digest from a strategic standpoint. They have at least four divergent businesses and Linux only makes up about 20% of the company’s revenue. That means a private-equity firm taking the company private and restructuring may be the most viable option at this point.

As of this posting, NASDAQ:NOVL is at $6.03 a share (above the $5.75 offer) which means The Street still thinks there’s more to play out in this story. We’ll be watching as it does.